Property prices rose dramatically throughout the 2000s. Business was good, and home ownership was up. People took out low-interest extra mortgages on their homes, confident they could pay them down with their incomes.
Then the housing bubble burst, unemployment soared, and now these same people cannot afford to pay down their mortgages. Numerous families are underwater in their mortgages, meaning the values of their homes have collapsed so rapidly that they now owe more on the mortgage than the house is worth. Any equity they put into it has been wiped out. Then the bank forecloses, evicts the owners, but the former owners still owe on the mortgage.
Wait, this happens? Not in Nevada, but in Spain. The European Union, particularly its periphery, is suffering a huge housing bust, and people are stuck without options. In Las Vegas though, things work differently—and for the better. Here are a few differences.
(1) In the U.S., homeowners can modify their mortgages based on the Home Affordable Modification Program. However, it is not a cram-down, meaning they can only negotiate over the interest and not the principal. Although, recently the New York Times discovered that some banks (JPMorgan Chase and Bank of America) were unilaterally offering homeowners mortgage modifications that include the principal. One woman had her $300,000 mortgage cut in half. It turned out the banks are targeting people with option adjustable rate mortgages, the dubious ones offered towards the end of the housing bubble.
(2) U.S. homeowners can short sell their homes. In a short sale, the homeowner and the bank agree to sell the home to a third party at a loss. The bank benefits by not foreclosing on the owner and having to sit on the property until another buyer comes along, and the homeowner is able to walk away from the home and the mortgage and move on with their life.
(3) Strategic default. It’s not an option we openly endorse. Simply walking away from the house and handing the keys to the bank is a way to avoid the fate of the Spanish homeowners who are forced to pay down debt on a house they no longer live in.
The purpose of this exercise isn’t to tell you that you’re better off than people in distant counties, but it does give us the opportunity to help you understand what your options are and why you have them.
If you have an underwater mortgage and are having trouble making payments, please feel free to contact an experienced Haines & Krieger Las Vegas bankruptcy attorney for a free initial consultation.